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The true causes of the housing crisis

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The blame should be accurately directed at Fannie and Freddie and their thirst for weaker underwriting to help meet their federally mandated 'affordable housing' goals.
AP Photo

Far from remaining silent, conservatives repeatedly spoke out against these distortions. Perhaps Miller wasn’t listening when Capital Markets and GSE Subcommittee Chairman Richard Baker cautioned in 1997 about “the risks and potential liabilities that GSEs represent.” Or as I questioned the costs and benefits of the CRA and the GSEs during hearings in 2004. Or when former Fed Chairman Alan Greenspan testified that “if GSE expansion continues unabated, preventive actions are required sooner rather than later.”

Democrats, on the other hand, chose to ignore the danger while heaping lavish praise on the system they now decry. On June 25, 2003, Miller extolled the “remarkable success for our country, for our nation, that we have the kind of widespread homeownership we have. We certainly need to extend it more broadly.” He praised the GSEs that “have played a huge role” in expanding homeownership, citing them as “one of the few bright spots” in our economy.

Today, Democrats divert attention from their compliance in these distortions by blaming risk-based pricing innovations like subprime lending for our current troubles. Of course, they ignore the fact that risk-based pricing gives responsible low-income borrowers increased opportunities akin to their higher-income counterparts by basing rates on a borrower’s ability to repay a loan. In doing so, properly underwritten risk-based pricing does more to make homeownership affordable for low-income individuals than any government mandate ever could.

Risk-based subprime lending, far from being predatory, has provided housing opportunities to countless thousands who otherwise would have been shut out from the American dream. However, it is worth nothing that I share the concerns that Miller voices about certain unscrupulous lenders using subprime loans to take advantage of ill-informed borrowers or those unprepared for homeownership.

The solution to that problem is not to outlaw subprime lending, as Miller suggests. Instead, we should vigorously enforce our existing consumer protection laws to prosecute the fraudsters who perpetrated such crimes in the first place and preserve subprime lending as an option for responsible borrowers.

Rep. Jeb Hensarling of Texas is the top Republican on the House Subcommittee on Financial Institutions and Consumer Credit and the vice ranking member of the House Budget Committee.

Readers' Comments (25)

Typical Republican - No Morals, No Ideas, No Brains. The blame for all of those terrible loans lies with those who initiated them. They were supposed to be issued only to those who could pay. It is clear that those mortgage brokers who sold the loans lied, cheated, and clearly misrepresented the ability to pay. There may have been some lack of oversight at the upper levels but the real problem lay with those who started the process.

oh this is all so much blather. whine whine whine. its like this,it doesn't matter to dems. just as 97 % of blacks voted for obama, anything that makes dems look like the shysters they are ,is so much noise. it doesn't matter ,the messiah is in charge. see you at the poor house when they are done raping the economy.

dvmike,franklin raines walked out of freddie with 96 million dollars,and rham got 362000 for three months on the board. raines got indicted then bought his way out for 27 million. dodd,raines,frank and a host of others should be in jail. oh ,by the way,these guys are all dems.

All you Dems who whine, complain, whine, whine and make no intelligent sense while doing it keep overlooking the fact that Frank, Clinton, Reid, Pelosi and yes, even Obama voted over and over for Fannie and Freddie to keep giving loans to millions of people who had no money, no jobs, let unemployment and welfare count as money towards a mortgage, etc, etc...MoveOn.org, ACORN and those radical groups would threaten Bank Presidents, go to their homes, stalk them outside the banks in order to pressure them to give loan upon loan to their minions of low income people...and it worked and now look at the freakin' mess you Democrats put us all in...and on top of that, Obama and his cronies let Fannie and Freddie just give out 212 million..212 million in bonuses last month...your uproar over AIG and the 165 million, what a joke because there was no Democrats leading the outrage over the 212 million in bonuses the government sponsored and Democrat run Fannie and Freddie gave out to their employees...hypocrisy and lies come out of every Democrats mouth in this country...you're all a bunch of losers and you chose the biggest loser you could to lead this country...2012 will come and he will be thrown out of office, taking his little stupid cronies with him...can't come fast enough you bunch of whiny little Dems...go collect your government checks for a couple more years and let us hard working, intelligent Americans, Independent and Republicans figure out how to get us out of the mess that YOU put us into! Obama and Carter...wow, what a legacy you people have.

. dodd,raines,frank and a host of others should be in jail. oh ,by the way,these guys are all dems.

All this pile of crap is caused by politics as usual.all

There's an even bigger pile of crap forming within the Democratic legislation that will make the mortgage mess small in comparison. The current administration being transparently socialist in mind and heart...will pile it up on a much larger scale with their determination to encompass and drastically assume ownership of more and more social and basic economic capitol foundations as well as our very liberty of freedom as a nation.

Just as in the case of working out a plan to take care of the underserved population concerning home ownership...Their plan never gave one tiny bit of consideration of who is better educated in who should and who shouldn't get mortgages...the politicians or those that have many years of experience and made careers of making mortgage lending decisions with sound tried and true measurement and rule of what constitute monetary qualification with actual history and documented financial earning and spending habits of the mortgage seeker.

Next on the list...Education, Health Care, and The type car we will be mandated to buy, the hours we will be mandated to serve the underserved with our privledged (as they deem it) time and the little dab of money we will be left with.

No consideration will be given to those that already have done these things with millions of dollars and hundreds of hours out of their private sector pockets and hide for decades. This is the problems you run into when an uninformed public goes to the voting booth and puts in office...a candidate that has spent his life raised in a Marxist socialist environment...he only understands and knows the ways to emulate (no matter the books he’s read on Abe and FDR) “Banana Republic” dictators. And so it goes.

This whole housing mess was a scam from the start of the original Bush administration. Clinton left with the discount rate at around 5.25 percent. Bush talked Greenspan into staying (bribed or threatened) who immediately then dropped the the discount to 1percent. Other rates dropped accordingly, including the mortgage rate. The banking and realty industry ignored previous banking rules regarding lending. The artificial demand for housing created by this racketeering raised demand , and thus, home prices escalated.

The media intentionally hyped the success stories of people rolling over houses and making large sums of money. The public was encouraged to buy the biggest homes they could and resell them in two to five years. Adjustable rate mortgages (arms) and bonus percentage discounts put people in homes they could never realistically afford. The profit lost in higher rates was made up in the of the loan and vast emounts of capital lent. Bush proclaimed as part of his 2004 reelction that "more Americans own homes than ever before". The problem was they didn't "own" them, couldn't afford them and were not worth what they paid. The pyramid scheme would soon come to an end as soon as Greenspan started raising the rates right after Bush's reelection.

The foreclosures started. The financial industry was using "derivates" to sell off the bad loans, and "default swaps" to reinsure these worthless loans. Both were criminal semantics to avoid following banking rules. The truth became public, the artificial housing prices came back to earth. Our government protected the banks and investors. The homeowners lost all their downpayment and walked away from their overpriced houses. MAny of the loans were sold to Freddie Mac and Fannie May as the profit ran out and the loans were doomed to default. Mush of the profit the banks did make was invested in Dubai, U.A.E.

Who's fault was it? This was planned criminal racketeering and industrial collusion by the Federal Reserve (interest rates); banking industry (predatory lending); insurance industry (intentionally insuring bad loans); Congress (passing legislation to make it possible); and mostly the Department of Justice for allowing it and looking the other way. That is why we have given billions back to forein banks holding "derivitives". This was a criminal act.

Hensarling is a master of the untrue. Critical review of the CRA's relationship with the banking meltdown has been done by a number of nonpartisan FED & academic studies and the results universally reveal that the CRA had little if anything to do with the meltdown. You notice that Hensarling doesn't even mention the deregulation of the financial industry or that darling of the economic right, former Sen Gramm and his disastrous legislation - the Commodities’ Futures Modernization Act of 2000 that forbid regulation of the credit default swaps market or AIG’s financial whiz kids who promoted their new hedge products that gave supposedly highly educated bankers the financial comfort to buy these CDO’s as AAA products. He also does not mention the minor fact that the investment bankers loved the subprime market loans because they made a financial killing. Yon know, risk based pricing - charging people who have a lesser ability to pay a higher interest rate and expecting them to be able to repay the usurious rates. He implies that Freddie / Fannie lead this market when, in fact, they were minor players. The sad truth is that studies have revealed that a majority of the subprime loans could have been made as conventional loans but because of the higher profit margin in the subprime loan products, mortgage brokers / originators were spiffed to sell the subprime products over conventional products. (Predatory lending) If people really think that the relatively small number of loans made under the CRA guidelines caused this mess, they really do not grasp the how the subprime / near prime markets were abused by the mortgage brokers / originators and middle class borrowers who used their homes as ATMs or for speculation in the wildly appreciating real estate markets. It would be nice if Republicans would just quit lying or that Politico would balance their reporting.

This whole housing mess was a scam from the start of the original Bush administration.

No actually it started with the" Fair Housing Act of 1968" which addressed "Red Lining" then came South Shore Bank in Chicago's SouthShore neighborhood. This bank, a community development was founded in 1973 to combat racist lending practices in Chicago's African American communities by providing financial services, especially montage loans to local residents. Then up jumped "The Reinvestment Act of 1977" which opened the door on a national level and gave birth to the current situation in home lending.

It is clear that those mortgage brokers who sold the loans lied, cheated, and clearly misrepresented the ability to pay.

When I bought my two houses I have to sign about 30 pages of disclosures. Don't tell me the buyers were too stupid to buy a house and were suckered. BTW, the solution to the housing crisis, if there is one, is to let prices FALL to where they should be. No more special handout programs for anybody, no Section 8 which artifically pumps up prices and rent and NO MORE $8,000 TAX CREDITs for buying a home. (Thanks for nothing GOP for the $8,000 tax credit handout that people like me will have to cover through future higher taxes). Also, start proscuting people who falsified their loan applications for bank fraud, eliminate Fannie and Freddie and repeal the CRA. And, it would make me feel better to throw Franklin Raines and Jamie Gorelick in jail for collecting bonuses on based on cooked book accounting numbers!

Rep. Jeb is the only distortion here. While the housing crisis was the beginning of the financial crisis, it would not have become the Global meltdown that it did without 1.) Alan Greenspan ignoring and refusing to acknowledge and stop the housing bubble/mortgage issue when he was warned- IN ADVANCE. 2.) Republicans including Hank Paulson going to the SEC and demanding the SEC Chairman Cox loosen regulation of debt to asset ratios. 4.) Republican CEO's and Finaciers (so-called FInancial Leaders and Wizards!) created and invested in staggering amounts of credit swaps, deriviatives and other financial instruments when they had little or NO knowledge of how they worked or how risky they really were. Rep. Jeb is full of it. Lying and trying to paste blame on anyone else, he's is a coward, a fool and a traitor who couldn't care less about this Country as long as he has his money, perks, and power. When Traitor State Texas secedes from the Union, be sure to take Rep. Jeb with you.

Mr. Hensarling, a half-truth is still a lie. Tell the whole story. What are you afraid of?

PJN: Apr. 29, 2009 - 10:39 AM EST

Rep. Jeb is full of it. Lying and trying to paste blame on anyone else, he's is a coward, a fool and a traitor who couldn't care less about this Country as long as he has his money, perks, and power. When Traitor State Texas secedes from the Union, be sure to take Rep. Jeb with you.

PJN: Apr. 29, 2009 - 10:39 AM EST

Rep. Jeb is the only distortion here.

Maserati: Apr. 29, 2009 - 8:32 AM EST

This whole housing mess was a scam from the start of the original Bush administration.

dvmike: Apr. 29, 2009 - 6:38 AM EST

Typical Republican - No Morals, No Ideas, No Brains. The blame for all of those terrible loans lies with those who initiated them. They were supposed to be issued only to those who could pay. It is clear that those mortgage brokers who sold the loans lied, cheated, and clearly misrepresented the ability to pay.

CRI WAS a big contributor to the problem - BUT - the "crucial blow" was delivered by ANDREW CUOMO who MANDATED 50% of home loans be given to low income people. "Affordable housing at any cost" became the mantra. Ancillary antagonists were groups like ACORN who used Mafia like tactics to enforce that mandate. Protests, accusations of racism, boycotts, threats, etc made sure the loans continued. Lenders, KNOWING they had crap as security bundled, sold and re-sold the assets. This Ponzi scheme works until ancillary prices soar (gas and food), housing values plummet ( no equity, no equity loans) and monthly payments cannot be made. The left wants to portray this as "blaming the poor". This is crap. The blame goes to the Liberal good intentions that CONNED these people into believing the American dream was an entitlement. Buy now - we'll help you. UNTIL the rubber meets the road and the people get foreclosed. THEY are the victims of ANOTHER Dem policy that FAILED. Now hundreds of billions of tax dollars get pumped into banks. Banks become indentured servants and government has to move in and "save" them. IF this administration REALLY gave a crap about poor people, they would have admitted their mistake. Spent tax dollars to solidify the financial positions of the homeowners they conned. This help should have gone DIRECTLY to the affected parties - BUT NOOOOOOOOO - "never let a crisis go to waste". Here's an opportunity to get government in the business of banking, car manufacturing and eventually health care. Remember, the British health care system is the second largest employer in the world. Once the government controls banks and cars, it's easier to get helthcare. Imagine - all those new Federal employees in unions, voting the "correct" way.

Both men (a Democrat and a Replublican) place the blame on CRA, Fannie May, and Freddie Mac. This started in 1992. The CRA changed the rules every year. The percentage of loans, in a given area, to those at a certain level of poverty had to INCREASE! Every time the government sets a policy there are ramifications. The economic melt down was the result. You cannot offer loans to people that cannot pay them back.

All you Dems who whine, complain, whine, whine and make no intelligent sense while doing it keep overlooking the fact that Frank, Clinton, Reid, Pelosi and yes, even Obama voted over and over for Fannie and Freddie to keep giving loans to millions of people who had no money, no jobs, let unemployment and welfare count as money towards a mortgage, etc, etc...MoveOn.org, ACORN

Fannie and freddie have never given or for that matter ever written a loan to anyone.

They are a secondary leader they buy loans from other institutions.

www.mcclatchydc.com/251/story/53802.html

Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans.

It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more.

This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.

To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.

But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.

Own up your ideology and political affiliation no one other than wing nut from the right evokes the ACORN boogyman.

Besides which they have nothing to do with this or any of the other things you try to blame ACORN for they haven't "stolen elections" they don't strong arm banks or who knows what other rubbish the wing nuts from will come up with next.

Andrew Cumo allowed Fannie and Freddie to increase their ratios by ten fold. He encouraged them to take the loans provided to them throught CRA. Daniel Mudd and Franklin Raines were happy to comply. This was a scheme only a diluted Democrat could come up with. It all comes back to the fact,"Loans should not be given to people who can't pay them back". If you are too ignorant to understand if you can afford it....You can't!

For a legislator, Mr Hensarling doesn't seem to be able to read a law.

There is absolutely NOTHING in the CRA that MANDATES lenders to make BAD FAITH LOANS.

Over and over in the CRA it iterates that the loans not be made to unqualified mortgages.

That the Republicans ignore the repeal of the Glass-Steagall Act as contributory to the collapse is disingenuous. Gramm-Leach-Bliley Financial Services Modernization Act ,which allowed the financial intuitions to get "too big to fail" by removing the regulations. This was a bi-partisan act. The pro-business trickle down fraud caused the downturn and Fannie Mae/Freddie Mac (which do not fall under the umbrella of the CRA and do not lend any money to anyone ) and CRA played little if any role.

The true causes of the housing crisis is Congress! The crisis cannot be simply laid upon a single member of Congress or a specific political party. They all created and contributed to this crisis and they all benefited financially and politically from their policies and programs until the **** hit the fan.

Christopher Dodd may be the newest face of the Senate Banking and Finance Committee but before him was Richard Shelby and before him was Paul Sarbanes. Every member on this committee,present and past, created this crisis and they all have one thing in common,the policies,programs and legislation they enacted were meant to squeeze every bit of political and financial enrichment for themselves, knowing full well when the **** hit the fan they would squeeze the taxpayers for all they were worth.

Typical Republican - No Morals, No Ideas, No Brains. The blame for all of those terrible loans lies with those who initiated them. They were supposed to be issued only to those who could pay. It is clear that those mortgage brokers who sold the loans lied, cheated, and clearly misrepresented the ability to pay. There may have been some lack of oversight at the upper levels but the real problem lay with those who started the process.

Mike, please read the article. Try to understand that there are lies, and there is truth. This article speaks truth.